Headline As Expected, Core a Bit Weaker. The February CPI report matched expectations for headline inflation, coming in just 3 basis points (bps) below our forecast. However, core inflation rose by 23bps month-over-month (MoM), falling a bit short of our 30bps projection. Table 1 details our MoM forecast errors. Over the past six months, our core CPI forecast has demonstrated strong accuracy, with a standard error of 3bps and a standard deviation of 7bps. The slight downside surprise in today’s report appears to be driven by volatile components and some softness in rents and owners’ equivalent rent (OER).
CPI/PCE Translation: Based on today’s data, we expect core PCE to come in at 28 basis points (bps) month-over-month (MoM), seasonally adjusted (sa), in February. Please note that this is a preliminary estimate and may be revised once PPI data is available.
Reaction to the incoming data: near-term forecast revised down a touch. Today’s data came in slightly softer than expected in the core segment, primarily due to lower-than-anticipated rents and owners’ equivalent rent (OER). While we are still analyzing the details, our initial response is to make a slight downward adjustment to our near-term forecast. We now project March core CPI at 28 basis points (bps) month-over-month. Looking ahead, we expect year-over-year core CPI (PCE) to reach 3.2% (2.8%) by June 2025 and 2.8% (2.7%) by December 2025.
Models Insights: Medium-Term Unchanged. The broader inflation picture remains unchanged. The distribution of price changes continues to show significant rightward skew, and little progress has been made over the last nine months in reducing inflation pressures. Our common inflation (CI) model estimates the core inflation trend (pi*) at around 2.5% in PCE terms and close to 3% in CPI terms. Meanwhile, our main medium-term model is unrevised, as today’s data did not alter our nowcast of the current quarter.
Conclusion: Inflation is Persistent, Upside Risks Remain. February’s report highlights the ongoing volatility in inflation data—one month brings a surprise in one direction, the next in the opposite. Stepping back, we continue to assess that inflation is consistently running above the 2% target. The Fed finds itself caught between two opposing forces: upward price pressures from tariffs and the risks of an economic slowdown. Given this backdrop, the most viable approach for now appears to be a “wait-and-see” stance—holding steady and refraining from immediate action.
Table 1. Updated MoM (sa) UnderlyingInflation real-time forecast errors in the last 6 months.
A PDF containing all relevant CPI charts has been posted. You can download it here.
Evidence from the distributions
The distribution remains unfavorable and inconsistent with the target. This month, the distribution is less dispersed but has a thick right tail and remains very different than pre-Covid (see ridge plot). The median (Figure 2) moved sideways. As shown in Figure 1, the overall picture remains unchanged: the distribution continues to differ from the pre-Covid pattern, with little progress over the past nine months. We still view the current environment as more conducive to inflation hovering around 3% rather than meeting the 2% target.
Figure 1. Kernel of CPI excluding food and energy items changes (MoM %, a.r.)
Note: the Figure shows the fitted Kernel (Epanechnikov) distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items.
Figure 2. Median (core) CPI metrics
Note: the Figure shows the median (MoM %, a.r.) of the distribution of CPI prices changes excluding food and energy items (left panel) and the YoY (right panel).
Evidence from our CI-C model
Our CI model estimates that, excluding idiosyncratic shocks, the common component remains above target. Figure 3 illustrates the decomposition of the MoM core CPI into “common” and “idiosyncratic” components. This month, the model estimates that the common component increased by 25bps, while the idiosyncratic shock contributed negatively (-2bps). The 3m/3m of the “common” component (Figure 4) stands at 2.9%. Overall, the CI model indicates that the “true” underlying pace of the data is very persistent, and remains above target and close to 3%.
An Excel file containing the results shown in Figure 3 and 4 can be downloaded here.
Figure 3. Contributions to MoM changes of CPI excluding food and energy items (CI model)
Note: the Figure shows the decomposition of the MoM percent changes of CPI prices excluding food and energy items. The contributions are estimated using our CI model.
Figure 4. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI model.
Implications for the medium-term forecast of core PCE price inflation
The medium-term is unchanged. Today’s data had no material impact on our Q1 nowcast in PCE space (we continue to expect that core PCE prices will expand 2.9% QoQ saar in the current quarter). The model’s latest Q4/Q4 forecasts are as follows: 2.8% in 2025, 2.6% in 2026, and 2.5% in 2027. This forecast remains above the latest SEP.
Figure 5. “Main” Phillips curve model forecast, core PCE price inflation (YoY, %).
Note: the figure shows the latest run of our “main” Phillips curve model. The confidence intervals (C.I.) are estimated using quasi-out-of-sample methods (estimate the model over a sub-sample, forecast, and calculate the root mean squared forecast errors).